What Is Underwriting in Life Insurance?
(Five-minute read time)
The world of personal finance can feel overwhelming at times. There are so many terms and concepts thrown around that it can seem downright impossible!
The good news is, it’s really not all that tricky. If you stick to learning just one concept at a time, before you know it you have a solid foundation of financial understanding that you can use to make informed and strategic decisions to help you reach your financial goals and set yourself up for success, whatever success means to you.
WealthTrack is here to help guide you through that journey, and today’s focus is all about underwriting.
What Is Underwriting?
Underwriting refers to when an individual or an institution takes on some form of financial risk in exchange for a fee. Usually, this looks like loans, insurance, or investments.
We call this process underwriting as a reference to when each risk-taker would write their name under the total amount of risk they are willing to accept for a previously determined premium.
The underlying factor across all forms of underwriting is risk. With respect to loans, the risk revolves around whether the borrower will successfully repay the loan or whether they’ll default. In the case of insurance, the risk surrounds the probability that policyholders will file costly claims. In terms of securities, the risk lies in the possibility that the underwritten investments will not be profitable.
Underwriting in Life Insurance
Underwriting is a process that everyone who applies for life insurance must go through. It’s all about determining whether the applicant is insurable, and if so, determining the suitable arrangement for their risk profile.
Underwriters assess the risks of a particular applicant’s situation and use those factors to determine the face amount of the life insurance policy as well as the size of the premiums, while also ensuring that the insurance product matches the needs of the applicant.
What Factors Do Life Insurance Underwriters Consider?
From an underwriter’s perspective, a riskier life insurance applicant is one who is most likely to require an insurance payout. Underwriters look at various aspects of an applicant’s health and wellness as well as their daily activities and routines to determine how much risk they carry.
These are some of the main factors that underwriters consider when crafting an individual’s life insurance policy:
Age
A person’s age is the primary influence on the cost of life insurance. Policies are typically less expensive for younger applicants, who have longer life expectancies and a lower likelihood of getting sick.
As a general rule, the cost of a life insurance premium increases an average of 8%-10% for every year of age. This means that the longer an individual waits to purchase life insurance, the higher the premiums will be.
For those with term life insurance policies (rather than permanent policies), the premium remains the same every year. When the term life insurance policy ends, a renewal or new policy will come with higher premiums because the individual will be older and health circumstances may have changed.
Health
A person’s health is a significant factor in life insurance underwriting. Most insurance providers require a medical exam in the underwriting process during which the company records your height, weight, blood pressure, cholesterol, and any other vital metrics.
If you know that you have a serious condition like diabetes or high cholesterol, it’s best to get it under control before searching for life insurance coverage in order to secure a competitive rate. Certain companies will offer life insurance policies that don’t require an exam, however, these policies are typically more expensive.
Family Medical History
Family history of serious medical issues like stroke, cancer, or genetic diseases may also affect a person’s life insurance underwriting process, as these factors increase the likelihood of illness for that person and therefore increase their risk in the eyes of the insurance provider.
Conditions that affect your nuclear family (your parents and siblings) are most heavily considered, however, some life insurance companies will factor in family medical history more heavily than others.
Lifestyle
Underwriters consider a person’s lifestyle choices when determining their risk level as well. This includes things like whether or not the person smokes cigarettes, but it also includes elements like risky hobbies.
Someone who is involved with car racing, scuba diving, or skydiving, for example, will likely have to pay more for life insurance. Underwriters will also consider a person’s occupation, with professions like miners or firefighters having a higher risk profile for example.
Driving Record
Life insurance providers may ask about driving violations during their application process, but they can also access your driving records of their own accord through the Ministry of Transportation. Any concerning driving violations have the potential to impact your life insurance policy.
However, it’s primarily the most recent three to five years of driving history that carry the most weight. Even if you find yourself with some unfavourable violations on your record, you have the potential to lower your life insurance premiums if you’re able to improve your driving habits and develop a strong driving record.
How to Approach the Life Insurance Underwriting Process
If you’re setting out to acquire a new life insurance policy, there are ways for you to make the underwriting process as seamless as possible.
Firstly, it’s important to be as honest as possible when answering application questions. Attempting to hide information to secure a less expensive policy will not be successful, and it will only complicate the process – or worse.
Second, you can alter elements of your lifestyle before undertaking the underwriting process if you’re interested in seeking the most cost-effective plan possible. While some risk elements like family medical history are out of your control, others are within your control (like smoking cigarettes or engaging in dangerous hobbies).
You can practice healthier habits to get your high cholesterol under control for instance, or improve your driving habits to build a stronger driving record. Even pursuing life insurance at an earlier age will lower your costs, since you’ll benefit from being younger at the time of underwriting, and you avoid the potential scenario of a higher-cost life insurance policy if you develop any health issues before you pursue life insurance.
5 Tips to Make Life Insurance Underwriting Easier
Do your best to maintain a reasonably healthy lifestyle before you decide to pursue life insurance.
Be transparent with your Life Insurance Advisor. The more they know, the better chance they can select the right insurance company and policy to match your health situation. Getting declined because of health issues can cause problems in future applications.
Pay extra attention to your choices if your application requires a medical exam or any fluids like blood work or urine samples. Alcohol, drugs, and even unhealthy foods can skew test results in the days following consumption.
Get lots of sleep the night before any exam or nurse visit, and consider a nice walk or some other light activity so that your body can be at its best.
Drink lots of water in preparation. Again, this will help your body be at its best for an exam or visit to a nurse.
If you have questions about the life insurance underwriting process or want to know how to reduce your life insurance costs, it's helpful to seek advice from a life insurance expert. WealthTrack provides professional life insurance, mortgage, and investment advice and we’re here to help you secure the best life insurance policy possible for your particular situation. Book a call with us today!
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